Palantir Is GAAP Profitable & That Matters
Palantir released their Q4 earnings last week and showed the market they were serious about one thing: being fiscally responsible.
Various interpretations of their earnings results have been talked about over the past few weeks. While Palantir did do some accounting tricks to show GAAP profitability, the point is that they did it.
To me, this was incredibly significant since CEO Alex Karp said in August of 2022 that profitability was not going to be on the table until 2025. This was disappointing to me since I didn't think it should take a company 5 years after going public to show profits, so naturally I had some doubts about this claim.
Seeing them show a quarter of 31M in net income and GAAP EPS of .01 was exciting because I expect them to continue this going into the future. I think I speak for everyone working and investing in Palantir: no one wants to see them going back to being unprofitable.
It's not going to be easy. They will have to cut costs and figure out how to be more efficient with their sales/marketing expense, along with how to grow enough to justify having net-income left over to show a profit. But if Karp and co. want to tell the market they are profitable and boast their chests, I just doubt they'd want to go back on that boasting outside of some external event no one is expecting that could cause issues with the business.
Full-year growth for Palantir came in below the 30% CAGR management told us they would get until 2025. While growth is slowing down, I do believe that there will be an inflection point resulting in an S-curve for growth when it comes to Palantir.
That inflection point is not here yet, which is why being GAAP profitable is so important. Until management can figure out how to get this product to exponentially scale, being fiscally responsible is the next best way to appease shareholders. If you believe in the Palantir thesis, then you understand why the product can be so transformational in so many industries. If so, you're willing to overlook the lack of growth and just hoping that with enough time, Palantir will figure it out.
Stock-Based Compensation reduced 27.5% YOY to around 564M for 2022. This is a dramatic decline from 1.2B in 2020 and 778M in 2021. If we can see SBC reduce closer to 30% in 2023, we'll likely have an even stronger chance to remain GAAP profitable. I talked more about SBC here.
Palantir's customer count growing 55% YOY was very encouraging. This is the number I want to see grow the most - the more diverse the clients are, the better chances of Palantir beginning to scale into different verticals will happen.
This is shown in the customers they were able to get in Q4 - 11 deals were at least $5M and 5 were $10M, which was different from prior years when most of their deals were at least $20M+.
Although growth has slowed down, the diversity of deals is exciting and should lead shareholders to believe that they may be sandbagging their numbers on future growth given the different industries and customer sizes they are targetting.
Now, Palantir still has one of the best balance sheets in the entire stock market. To have over 2B in cash with no debt while interest rates will continue to remain high is one of the biggest selling points of the stock at the current valuation.
The question becomes what they will do with this cash. As we all saw, the bad part about this earnings were that not only has growth come down (except in US commercial that is growing "like a weed" in the words of Karp at 67% YOY) but also operating margins have come down from 31% to 22%.
This is likely from the increase in sales, marketing, and general expenses they need to begin to scale. Gross margins remain strong at 80%, but operating margins will need to increase, along with growth, in order for the company to continue remaining GAAP profitable and keep wall street happy.
My biggest takeaway on this earnings still continues to remain qualitative. I honestly think the numbers during these early years are just not as important as understanding what the company is actually doing.
When I dive deeper into their partnerships, how they are securing multi-year deals with governments, how much companies are saving while using them - it all leads me to believe that the company is building a foundation for a generational company over the next decade and some numbers here and there on earnings calls are relatively irrelevant.
The market loved GAAP profitability and shot the stock to $10+, but as we can all see in a bad macro, the stock easily has fallen back to $8 simply because of forces outside their control.
Palantir will maintain it's gains when growth and GAAP profitability are consistent, and in order for that to happen, the company honestly just needs time to continue building out a world-class product and business.
You either believe they can do it or you don't, and that's the fun part about taking a bet on a generational company.
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